productivity

Defining productivity

Any organization can be seen as a system, using inputs (labour, material, capital, energy, information) to deliver outputs to their external customers (products, services). This system view can also be applied to individual departments, teams providing products or services to internal customers.

Productivity is the link between this output and the inputs. Total Productivity is defined as the relationship between the quantity of the outputs, produced by the system during a time period and the quantity of resources (inputs) used for this during the same time period

Remarks:

when you measure productivity you have to choose the units for the calculation. This is usually a monetary unit, as you need to add up all different inputs.
the input factor ‘information’ is usually hard to measure in a monetary unit and is therefore mostly taken out of the calculation

We can also define ‘Partial Productivities’: these are relationships between the output, produced in a time period and only the quantity of ONE input type that is used over the same period.

Here there is a more flexible choice of units: Output can be measured in terms of number of products/services, revenue, added value, while labour can be quantified in man hours, number of persons, total labour cost, …

Why is measuring Productivity important?

Productivity is a metric that tells you something about how effective and efficient your organisation is in transforming the inputs into outputs for the customer; it tells you about how organization works and is organized.

As such, productivity is an important and an interesting measure. It tells something not only about past performance, but also about the future capabilities and chance for success of your organization.

The importance of Productivity Improvement

Productivity has always been and will always be an important measure in any organization. Improving productivity will always be an important goal.

If productivity goes down, this will cause a downwards spiral for your organization. Indeed, since you need more resources for the same output, the cost will increase (and hence your prices). This can cause sales to drop resulting in less orders and less utilization of your capital investments and labour. This way the output will decrease while the input stays the same or decreases at a slower rate. Hence, your productivity will decrease again, resulting in the same effects as just described.

Improving productivity will cause an upwards spiral. Your products/services will be cheaper, resulting in more profit on the short term or increased sales (if you lower your price). This will cause a better utilization of your resources, which again makes productivity go up again.

How to improve Productivity?

As productivity (both total as partial) is the output divided by the input, it is clear that in practice following ways are available for improving productivity:

higher output with the same input
the same output with lower input
an increase in input together with a bigger increase in output

Although organizations chose often for the second solution (and with a big focus on labour and not so much on the other factors), the real power of productivity improvement lies in the 1st and the 3rd option, as this will promote growth of your business.